1035 Exchange

A method of exchanging insurance-related assets without triggering a taxable event. Cash-value life insurance policies and annuity contracts are two products that may qualify for a 1035 exchange.

401(k) Plan

A qualified retirement plan available to eligible employees of companies. 401(k) plans allow eligible employees to defer taxation on a specific percentage of their income that is to be put toward retirement savings; taxes on this deferred income and on any earnings the account generates are deferred until the funds are withdrawn—normally in retirement. Employers may match part or all of an employee’s contributions. Employees may be responsible for investment selections and enjoy the direct tax savings.

401(k) Loan

A loan taken from the assets within a 401(k) account. 401(k) loans charge interest and are normally paid back through payroll deductions. If the borrower leaves an employer before a 401(k) loan has been repaid, the full amount of the loan is generally due. If the borrower fails to repay the loan, it is considered a distribution, and ordinary income taxes may be due, along with any applicable tax penalties.

403(b) Plan

A 403(b) plan is similar to a 401(k). A 403(b) is a qualified retirement plan available to employees of non-profit and government organizations.

Inheritance planning or succession planning for our assets is very important but the question arises when to do it? No doubt most of us are worried about handing over control and ownership of our wealth whenever we are alive, giving it away now can be the part of a plan but the problem is you may need it later on because no one knows the life span of any person. As it is a general research that 1 in 6 of us alive today will reach the age of 100, so how you manage the division of your wealth is critically important. When it is possible to give it away now and still keep control of it then why you don’t use your right?

No doubt your wealth has taken you a lifetime to build, so it would be overwhelming to see some (or all) of it vanish and divest your family of their rightful inheritance. You can do great for inheritance planning fortunately, in this country we have right to use Trusts. Placing your assets in Trust is a cost efficient option and it will mainly solve a huge amount of other issues at the same time, such as:

1 – Probate expenses are always far greater than people anticipate, normally 3% of the value of your belongings +Vat +expenses, let without help the nuisance and substantial delay in administering it.

2 – Inheritance Tax valid if the value of your assets surpasss the accessible Nil Rate Band thresholds at the date of death.
3 – Sloping disinheritance permits the other partner to remarries after your death, it doesn’t require to create a new Will and the whole property passes to him/her, disinheriting the children from the first marriage.
4 – Uutrustworthy children If your child involved in certain cases whether it be drink, drugs, gambling or even an unfortunate divorce, could see your hard earned inheritance to them wasted. This problem you can solve with the help of inheritance planning.
5 – Inability and ‘means testing’ for care home fees can be devastating to your estate and your children’s inheritance.
6 – Anyone (with just cause) can and probably will contest your Will if you fail to make ‘reasonable financial provision’ for them. By using a Discretionary Trust you can avoid this and succeed with your plans with the help of financial advisor Birmingham Al at

Inheritance Tax(IHT) Guidelines

  • The Annual Exclusion: You can give away £3,000 each year, so a couple can give away twice this amount. If you don’t use this allowance one year, you can use it in the next year.
  • Gift Assets to your Children: These are known as ‘potentially exempt transfers’ (PET’s) and provided you survive 7 years then the job is done. Who should make the gift? Will you lose control of the asset that you’ve gifted? Well, you can protect the gift in the hands of the recipient so you don’t need to lose total control of it.
  • Gift part of your house to your children: After 7 years it is out of your estate for IHT. The trouble is you have to pay full market rent to your children. They in turn have to pay income tax on the rent received. If they sell it they will be liable for Capital Gains Tax (CGT) on the gain on their share, and if you get it slightly wrong the gift will fail entirely. The better solution is for one spouse to sell their half share of the house to the other spouse in exchange for an IOU, which is then gifted to the children as a 7 year PET. After 7 years, half the ‘value of the house’ is out of the estate for IHT, but the married couple still owns the entire house.
  • IOU Scheme: As guideline no. 3 above but it can be done with any belonging, e.g. a share portfolio, second property and so on. When set up properly, the value of the asset will be taken out of the estate after 7 years.
  • Deed of variant (DoV): Say a relative dies and leaves you an inheritance that creates you an IHT liability. Use the DoV procedure to vary that Will after death and set up a Trust to receive the inheritance for the benefit of you, and your family. There are time limits but this works very well if set up correctly.
  • Gift out of regular income: If you have an IHT estate and your income is higher than your expenses, the problem will only get worse as time goes by. Gifting the excess out of regular income to your children is immediately exempt from IHT. The rules can be tricky to implement but this is a very significant exemption if used correctly.
    Business Property Relief (BPR) Scheme: If you hold investment belongings in a BPR scheme for only 2 years they will be 100% exempt from IHT. You need to retain these assets until you die but you can get an income and, since you have not given these assets away, you can cash them in at any time if you need to.
  • Settler Excluded Trust: If you want to gift an asset to your children to avoid your IHT after 7 years, but the asset has gone up in value (like a house) and would trigger a CGT liability if you sell it, you could instead set up a Settler Excluded Trust and transfer the asset to that trust. As you are the Settler and a trustee you therefore retain control of the asset, but as you will have no benefit from it, given 7 years it will be out of your estate for IHT and you will get holdover relief for CGT as well.
  • Discounted Gift Trust: Can seem attractive and you can get an immediate IHT exemption for part of your initial investment. The trouble is the portion that is exempt is based on your age and health so it may not be as great as you had wished for.
  • Family Protection Trusts (FPT’s): Avoid the problem in the first place. If inheriting from your parents is going to give you an IHT problem, get them to set up FPT’s because with their assets ‘in trust’ you will have the option of borrowing your inheritance from the trust in exchange for a valid IOU so that you get the full benefit of the inheritance without incurring an IHT liability.